Zurich Financial quits RBS insurance auction

By Steve Slater and Sven Egenter

LONDON/ZURICH (Reuters) - Zurich Financial Services (ZURN.VX) pulled out of the auction for Royal Bank of Scotland's (RBS.L) insurance business on Thursday, dealing a major blow to the bank's sale plan.

Zurich had been considered the frontrunner to buy the asset, according to industry sources. In a brief statement it said it had carried out "a detailed review of opportunities" for RBS Insurance but did not say why it withdrew.

RBS declined to comment.

The bank had been seeking to sell its insurance arm -- which includes the Direct Line and Churchill brands -- for over 7 billion pounds, but price expectations have been cut in recent weeks as potential bidders have withdrawn and the credit crunch has deepened.

"The bad news is that no-one is interested in buying it at such a high price like 7.5 billion pounds," said Mamoun Tazi, analyst at MF Global.

But Mamoun said it was positive that RBS is now likely to end up keeping the business, which adds diversity to the group and should be more resilient than other areas during a downturn.

RBS Chief Executive Fred Goodwin said a month ago he was confident of selling the insurance arm for the price he had in mind at the start of its auction, but he has said he would not sell it at a knock-down price.

Zurich had been seen as the strongest bidder as it had the necessary financial firepower for a big deal, it has been expanding in Britain and it had hired RBS Insurance's former boss in 2006.